23 March 2012

Japan, Innovation and Electronics

The plunge in the past decade is nothing short of breathtaking. From 2000-2010, Japan's electronics production plummeted 41%, exports tumbled 27%, and the sectoral trade surplus dived 68%. Counting only exports by high-income OECD countries (to avoid the impact of China), Japan's global market share of electronics goods and services exports fell by nearly half, to 10% in 2009, from 19% in 1996. In the same period, Germany's share rose to 11% from 8% and Korea's rose to 9.2% from 6%.

The immediate cause of the problem is bad product strategy. Japanese firms and the government failed to heed two big lessons taught by Harvard Prof. Michael Porter. First, as countries mature, their sources of competitive advantage change. At one point, abundant skilled labor, cheap capital and price are keys to competitiveness. Later on, innovation in products and processes becomes pivotal. Secondly, strategy is not just about what products to offer, it's also about what products not to offer.

Rejecting these lessons, Japanese firms tried to compete with newcomers like Samsung on cheap capital and manufacturing prowess instead of product innovation. They kept producing formerly world-beating products that now lose money year after year. Forty percent of Japan's electronics output still consists of consumer audio-video products and semiconductors.

Why does this matter? Katz explains:

Seventy-seven percent of Japan's entire electronics output now consists of parts and components that often go into other firms' products. Yet a cost breakdown of Apple's iPod or iPad or Samsung's Android smartphone shows that the real money does not go to the parts producers but to the product inventors. Japanese firms are competing against Samsung when they should be competing against Apple, Intel and Microsoft.

Knowing when to hold'em and when to fold'em is essential to effective innovation, for businesses and policy alike.